The Supreme Court’s rulings in Hopcraft, Wrench and Johnson were hailed as a victory for the lenders. But the sector is bracing for further litigation
Last Friday’s Supreme Court ruling in Hopcraft v Close Brothers was greeted by most commentators as a big win for car finance lenders. One lawyer declared that the judgment has staved off ‘the biggest consumer compensation crisis in UK history’.
Nevertheless, the ongoing bombardment of advertisements from claims firms indicates that the mis-selling scandal will not abate for a good while yet. Indeed, the message coming from some in the claims industry is that the court’s decision has galvanised and focused its activities, rather than dampened them.
Justices found that car dealers owed no fiduciary duty to customers and rejected the argument that undisclosed commissions automatically amount to a ‘bribe’. But in the one case upheld, Johnson v FirstRand Bank, the court also ruled that a 55% discretionary commission was unfair. It was ‘highly material’ that documents ‘were intended to create the completely false impression’ that the dealer would select the best deal for Marcus Johnson from a panel of dealers.
Another factor was Johnson’s lack of sophistication. Court president Lord Reed said: ‘The court questions the extent to which a finance company could reasonably expect a customer to have read and understood the detail of such documents, particularly when no prominence was given to the relevant statements.’
That has left the way open for the claims industry, which had signed up thousands of potential customers and invested millions in marketing, to capitalise.
Louisa Klouda, chief executive of litigation funder Fenchurch Legal, said: ‘The ruling closes the door on bribery claims but keeps a clear, evidence-based pathway open for consumers whose finance agreements involved large or hidden commissions.’
The Financial Conduct Authority’s plans for a redress scheme, notified last weekend, appear designed to stymie the involvement of lawyers. Indeed, the City watchdog took the opportunity to reiterate its warning that ‘consumers do not need to use a claims management company or law firm’ and that doing so ‘could cost them around 30% of any compensation paid’.
Most individuals will probably receive less than £950 in compensation per agreement, the regulator added, while the final cost of the scheme is forecast to be £9bn-£18bn.
Nikhil Rathi, FCA CEO, said: ‘It is clear that some firms have broken the law and our rules. It’s fair for their customers to be compensated. We also want to ensure that the market, relied on by millions each year, can continue to work well and consumers can get a fair deal.
‘Our aim is a compensation scheme that’s fair and easy to participate in, so there’s no need to use a claims management company or law firm. If you do, it will cost you a significant chunk of any money you get. It will take time to establish a scheme but we hope to start getting people any money they are owed next year.’
'Until now, we have maintained only a small exposure to PCP [personal contract purchase] commission claims, waiting for clear guidance from the courts and the regulator. With the Supreme Court judgment settled and the FCA’s redress scheme consultation announced, that clarity has arrived'
Louisa Klouda, Fenchurch Legal
It is not yet clear whether the scheme will require all customers who took out motor finance between 2007 and January 2021 to be automatically opted in.
Klouda is among many who believe there is still a very clear role for legal advisers in the redress process. ‘Until now, we have maintained only a small exposure to PCP [personal contract purchase] commission claims, waiting for clear guidance from the courts and the regulator,’ she added. ‘With the Supreme Court judgment settled and the FCA’s redress scheme consultation announced, that clarity has arrived.
‘Accordingly, we will widen our motor finance portfolio but only into defined, evidence-rich DCA [discretionary commission arrangement] claims that mirror the Supreme Court’s guidance.’
Darren Smith, managing director of Blackburn-based firm Courmacs, which is acting for 1.5 million car buyers, said: ‘The court has… not ruled on the position where a discretionary element was applied to the commission. This still leaves many victims who will be entitled to redress but the story does not end here. The next chapter will be in September when the Court of Appeal will be hearing a case relating to the way the financial services ombudsman has dealt with discretionary commission arrangements.’
Referring to the FCA’s redress scheme, he said: ‘The FCA’s indications on the level of compensation are also concerning from a consumer detriment perspective. The complexity and uncertainty for individual victims now makes it more important than ever that they are properly advised by qualified solicitors who are able to take cases to court, unlike CMCs. Above all, it is vital that victims have choice and access to justice.’
'The [Supreme Court] had the chance to stand up for fairness and transparency but instead has handed a victory to the finance industry. … Sadly, [the] decision leaves many victims without a clear path to justice'
Robert Whitehead, Barings Law
Robert Whitehead, chair of Manchester-based Barings Law, described the Supreme Court decision as a ‘major blow to consumer protection and a missed opportunity to address one of the financial sector’s most troubling practices’.
He said: ‘The court had the chance to stand up for fairness and transparency but instead has handed a victory to the finance industry. At Barings Law, we’ve been proud to lead efforts to bring these claims forward. We pioneered the use of omnibus claim forms to make the process affordable and accessible for everyday people, not just those who could afford years of litigation. Sadly, [the] decision leaves many victims without a clear path to justice.
‘Despite this setback, we remain committed to our clients and to fighting unfair financial practices wherever we find them. This ruling may slow things down, but it will not stop the movement toward greater transparency in the car finance industry. People deserve to know the true cost of the financial products they’re sold, and they deserve to be treated fairly.’
Alex Neill, co-founder of consumer protection group Consumer Voice, also maintained that the judgment ‘doesn’t let the lenders off the hook’. She added: ‘While it’s disappointing that the ruling has significantly narrowed the circumstances under which redress applies, it’s welcome the Supreme Court has recognised some consumers deserve compensation. Billions of pounds are still owed to consumers who had their interest rates unfairly hiked or faced the most excessive charges.’
A knockback for the chancellor
In anticipation of Friday’s rulings going against the lenders, chancellor Rachel Reeves was reported to be considering effectively overruling the Supreme Court’s decision through retrospective legislation.
In January, HM Treasury had unsuccessfully attempted to intervene in the case. Court president Lord Reed pointedly addressed that failure in his hand-down summary: ‘The FCA was permitted to intervene. The Treasury also sought to intervene but their application was refused, as their arguments concerned the economic consequences of the Court of Appeal’s decision. The Supreme Court is only concerned with the legal issues in the case.’
The president said the unusual timing of the judgment – 4.35pm last Friday – was explained by the need to avoid ‘market disorder’. The court was advised by the FCA that the outcome, whatever it was, might affect the share prices of companies involved in the car finance market. ‘The market will need time to digest the judgment and consider its implications,’ Reed added.
Corporate lobby group Fair Civil Justice took a different tack. It cited promises allegedly made by some claims firms in advance of the Supreme Court ruling, and questioned whether clients may have been misled.
Executive director Seema Kennedy said: ‘The FCA says the average payout will be around £950 – that’s a world away from the £5,000 plus many law firms and claims companies have been telling people to expect. What is still unclear is whether people who’ve signed up with those firms could be charged hefty exit fees if they want to go through the FCA’s compensation scheme instead.’
Susannah Marsh, partner in financial services litigation at Moore Barlow said: ‘This decision prevents what could have been the biggest consumer compensation crisis in UK history after PPI. As the threat of billions in industry-wide payouts has been lifted, the financial services sector may breathe a sigh of relief, however this doesn’t put a pin in the issue entirely. While the Supreme Court ruling might prevent mass litigation, there may still be litigation to come. Ultimately, we’re not out of the woods yet.
‘For claims management companies, this ruling will force them to change their strategy. The separate discretionary commission arrangements (DCA) claims – affecting 40% of deals where dealers secretly hiked interest rates – will still proceed through the FCA’s regulatory route. The regulator remains committed to its redress scheme, potentially including automatic payouts for affected customers.’
Tom Hanson, regulatory disputes partner at Dentons, was less equivocal. Describing the judgment as a ‘complete victory for car dealers and a significant win for lenders’, he added: ‘The scope of lender liabilities under the consumer credit act will require some analysis’ which would be a ‘likely’ area of focus for any FCA redress scheme.
Parham Kouchikali, financial services disputes partner at Taylor Wessing, said the judgment provided ‘much needed clarity and certainty on when fiduciary duties arise’ meaning ‘the main legal ground for claims against lenders and dealers has fallen away’.
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